Following last week’s earnings, it appears Wall Street sees clear skies ahead for Microsoft Corporation (NASDAQ:MSFT). But if bullish investors are considering a purchase today, they might want to hedge shares with a collar. Let me explain.
Another earnings beat punctuated by solid sales growth from Microsoft’s Azure cloud unit and upbeat guidance has Wall Street playing the Pied Piper shtick. Estimates from a handful of firms such as Stifel, KeyBanc and Credit Suisse boosted price targets on MSFT stock towards $1.0 trillion in market capitalization compared to the share’s current $830 billion valuation.
And MSFT stock certainly looks friendly and trendy on the price chart.
After a couple months of corrective activity this past spring, the reboot of what I like to call Microsoft Version 2.0 has been reaffirmed with its steadier technical climb to fresh all-time-highs and overbought stochastics condition.
There’s not much more to say or for that matter, see on the provided weekly chart.
MSFT Stock Weekly Chart
But are Microsoft shares all they’re cracked up to be? A less vocal minority from the sell side of Wall Street sees MSFT stock’s price multiple as overvalued, signs of a disconnect with sales growth and a drop in the net payout yield below 3% as worrisome.
What’s my take on Microsoft shares off and on the price chart? Personally, the consistent manner in which Microsoft has been executing and reaping the rewards of its return to growth is exciting and a story worth being positive on.
Sure, Wall Street is known to get ahead of itself at times. And this could very well be the case right now in Microsoft. But as periods of enthusiasm can persist for much longer than you or I think is possible, I wouldn’t bet against MSFT stock continuing its run towards $1.0 trillion and beyond. That being said, I’d also look to smartly hedge that enthusiasm using the options market.
MSFT Stock Collar
Given our position on MSFT stock, a collar strategy is a smart way to own shares as they trend higher. This type of spread also allows bullish investors to be in a potentially stronger financial and mental position to accumulate Microsoft on any surprise and significant price weakness in the future.
Reviewing Microsoft’s options and shares at $108.38, the September $115 call / $100 put collar for $108.46 is attractive. For less than 10 cents premium to MSFT stock this fully-hedged, but adjustable position guarantees investors protection below $100 in shares in the event some sort of calamity on the price chart does occur.
If conditions remain trendy and MSFT stock rallies, profits are initially capped at $6.54 or a return of 6% as the investor has sold the $115 call to finance the protective put.
For a couple month holding period and given the very affordable insurance built into the collar, that’s not bad at all. Throw in a token quarterly dividend of 42 cents and the ability to modify the collar over time to generate even stronger risk-adjusted returns; this strategy is a nice silver lining for buying a potentially riskier MSFT stock today.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
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